Pound Recovery Looks Distant on Weak U.K. Data, `Brexit' Risks

  • Inflation and wages data forecast to remain little changed
  • Clarity on referendum date expected from Feb.18-19 EU summit

Pound bulls hoping for a sustained recovery in the currency may be disappointed as next week brings a combination of domestic data and a European Union summit that may confirm the timing of the U.K.’s referendum on its membership.

Sterling depreciated against most of its 16 major peers this week as Prime Minister David Cameron stepped up lobbying efforts to reach a deal that may allow him to hold a vote as early as June. A date is only likely to be set, though, following the EU summit in Brussels on Feb. 18-19. Reports next week are forecast to show inflation and wage growth remained little changed, according to economists in Bloomberg surveys.

“Data will be the main driver for the pound," said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt. “I don’t see any significant recovery of the pound at this point because there are so many other risks apart from the fundamental ones, including the upcoming EU summit. We might get clarity on the vote’s timing next week but not on its final outcome," she said.

The pound slipped 1 percent this week to 77.66 pence per euro as of 5 p.m. London time on Friday. Sterling fell 0.3 percent in the week to $1.4467.

Britain’s uneven recovery and risk of a possible exit from the world’s largest trading bloc have prompted investors to become more bearish on the pound this year with money markets pushing back the prospect of an interest-rate increase by the Bank of England.

Rate Outlook

Forward contracts based on the sterling overnight index average, or Sonia, project the chances of a 25-basis-point cut in the BOE’s official bank rate by the December meeting were about 56 percent. As recently as the turn of the year, an increase in November was fully priced in.

U.K. government bonds climbed this week. The benchmark 10-year gilt yield fell 15 basis points, or 0.15 percentage point, to 1.41 percent after dropping to 1.226 percent on Thursday, the lowest since Bloomberg began collecting the data in 1989. The 2 percent security due in September 2025 rose 1.32, or 13.20 pounds per 1,000-pound face amount, to 105.225.

The U.K.’s Debt Management Office is scheduled to sell 2.75 billion pounds of gilts due in July 2026 on Feb. 17. It allotted 1.5 billion pounds of gilts due in January 2045 on Feb. 11 to yield 2.208 percent, a record low for a 30-year auction.